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Why Gurus Noticed This Stock

April 01, 2014 | About:

The Deepwater Horizon negatively affected the oil and gas’ offshore segment. Since then, the offshore exploration, drilling and production has gone through some evident changes. The most important of all has been the move inland by the industry, aided by the gas boom experienced by North America. During that time, oil and gas production focused on unconventional reserves giving fracking a new breath. As the boom ran out of air and wells mature, the industry began a new displacement. Now, the Gulf of Mexico is turning into the new hot spot for the industry, offering companies like Diamond Offshore (DO) interesting growth prospects. Gurus have noticed the new market trends and been active on the stock during 2013. Will market synergies make this stock valuable when considering a long-term investment?

Fleet Expansion and New Management

Besides scaring off investors and calling the attention of environmentalists, the Deepwater Horizon incident had other consequences. Upon Diamond Offshore, the most notable is the online publication of the full list of offshore rigs with an in-depth description. The firm counts with 45 offshore drilling rigs, 33 of which are semisubmersibles. Moreover, the construction of additional units is underway and expected to be delivered in the coming year.

The announcement of new President and Chief Executive Officer Marc Edwards had little impact on the market. The stock price barely moved, and dropped further not long after. Nevertheless, he must be doing something right after all, as the stock price is on a two-week uptrend. That has been the longest climb since June 2012.

Looking back, 2013 was not a good year for Diamond Offshore. Operating income decreased due to a reduction in contract drilling revenue, while drilling expenses and debt recognition rose. To put it bluntly, the Ocean Monarch, Ocean Star, Ocean Lexington and Ocean Quest recorded 337 fewer revenue earning days in the second half of 2013 alone. Those days of unproductivity were related to downtime, but also relocation of rigs' geographic locations and 35 changes in operating cost structures.

Steady Recovery or a Bump on the Road?

Starting 2014, Diamond Offshore has received improving ratings from financial institutions. Financial discipline, timing of the newbuild cycle, increased footprint in emerging markets and rewarding shareholders are the policies highlighted by analysts. Additionally, overall performance is benefiting from greater activity in the North Sea, a region where the firm is well positioned.

The greatest downside to Diamond Offshore is the average age of rigs. An issue that requires a great capital investment and most of all time. In the meantime, the company’s rigs are the most preferable platforms for producing when more modern ones are not available. Hence, the long distance mobilization of rigs is evidence of the extent to which the company will go in order to have its capital employed.

The upside to old assets is Diamond Offshore’s sound finances and strong cash flow. Both tools can have a remarkable impact on the company if well used to reward old and attract new shareholders. But, an important share should be destined to asset renewal if the firm is to remain competitive in the long-term. For the meantime, an increasing presence in Brazil, Australia and West Africa may help to reduce off-duty day rates.

Currently trading at 12.4 times its trailing earnings, Diamond Offshore’s stock carries a 12% discount to the industry average. However, the discount combined with a comparable low stock face value elicited small transactions among gurus. Not even the largest shareholders, Renaissance Technology and John Hussman (Trades, Portfolio), have registered a purchase through the second half of 2013. It is recommendable to stay away until ordered assets become operable and reduce off duty days. That will represent a significant impact on overall performance, while at the same time better position the firm.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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